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    Economics IGCSE Chap 20-Firms and Production

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    eysha
    Here are some examples of external economies and diseconomies of scale: - External economies - Shared infrastructure like roads lowers costs for all firms in an industry as the industry grows. - External diseconomies - Traffic congestion and pollution in a dense industrial area raises costs for all firms as the industry size increases. - External economies - Specialized suppliers emerge to serve the industry, lowering costs for materials and parts. - External diseconomies - Shortages of skilled labor or materials emerge as the industry expands, bidding up costs. - External economies - Knowledge spillovers occur as workers move between firms, improving innovation and efficiency across the industry. - External diseconomies - Competition for scarce

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    Economics IGCSE Chap 20-Firms and Production

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    eysha
    169 views59 pages
    Here are some examples of external economies and diseconomies of scale: - External economies - Shared infrastructure like roads lowers costs for all firms in an industry as the industry grows. - External diseconomies - Traffic congestion and pollution in a dense industrial area raises costs for all firms as the industry size increases. - External economies - Specialized suppliers emerge to serve the industry, lowering costs for materials and parts. - External diseconomies - Shortages of skilled labor or materials emerge as the industry expands, bidding up costs. - External economies - Knowledge spillovers occur as workers move between firms, improving innovation and efficiency across the industry. - External diseconomies - Competition for scarce

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    Economics IGCSE chap 20-firms and production

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    Here are some examples of external economies and diseconomies of scale: - External economies - Shared infrastructure like roads lowers costs for all firms in an industry as the industry grows. - External diseconomies - Traffic congestion and pollution in a dense industrial area raises costs for all firms as the industry size increases. - External economies - Specialized suppliers emerge to serve the industry, lowering costs for materials and parts. - External diseconomies - Shortages of skilled labor or materials emerge as the industry expands, bidding up costs. - External economies - Knowledge spillovers occur as workers move between firms, improving innovation and efficiency across the industry. - External diseconomies - Competition for scarce

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    169 views59 pages

    Economics IGCSE Chap 20-Firms and Production

    Uploaded by

    eysha
    Here are some examples of external economies and diseconomies of scale: - External economies - Shared infrastructure like roads lowers costs for all firms in an industry as the industry grows. - External diseconomies - Traffic congestion and pollution in a dense industrial area raises costs for all firms as the industry size increases. - External economies - Specialized suppliers emerge to serve the industry, lowering costs for materials and parts. - External diseconomies - Shortages of skilled labor or materials emerge as the industry expands, bidding up costs. - External economies - Knowledge spillovers occur as workers move between firms, improving innovation and efficiency across the industry. - External diseconomies - Competition for scarce

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    of 59

    Economics

    With Zaif Hassan Fazal


    There are different ways to classify firms
    • Stage of production
    • Size of the firm
    The stages of production
    Primary sector Secondary sector
    which involves which processes
    the extraction the raw materials
    The stages and collection of
    basic raw
    into finished or
    semi-finished
    of materials. goods.

    production/
    Quaternary
    Sectors of Tertiary sector sector covers
    which involves service industries
    production the provision of
    services to the
    based on
    knowledge
    public. (information
    technology, IT)
    Let’s choose which sector each of the
    below falls under
    • Education
    • Construction
    • Fishing
    • Tourism
    • Telecommunication
    • Transport
    • Writing a book
    • Making a PlayStation (PS) game
    • Making an anime
    • Agriculture
    Industrial structure of economies
    Some firms are in the
    private sector
    Ownership
    of firms
    Some firms are in the
    public sector (state-
    owner enterprises)
    The size of
    firms
    This Photo by Unknown Author is licensed under CC BY-SA
    Three ways to
    measure the size
    of a firm
    Three main measures of the size to
    understand the size of the firm
    • Number of workers
    • The value of the output it produces
    • Value of the financial capital it employs
    Factors influencing the size of firms

    Availability of Type of business


    Age of the firm
    financial capital organisation

    Internal
    economies and The size of the
    diseconomies of market
    scale
    Small firms
    This Photo by Unknown Author is licensed under CC BY-SA
    Why do some
    firms remain
    small?
    Why do some firms remain small?

    Small market Consumer Owner’s


    Flexibility
    size preference preference

    Lack of
    Government
    financial Location Specialisation
    support
    capital
    Advantages small firms have
    • Flexibility – can make decisions quickly and adapt to market
    conditions
    • Specialisation
    • Government support
    • Less formalities – setting up easier
    • Can cater to a niche market and charge high margins
    • Customer loyalty
    Disadvantages and challenges small firms
    face
    • High administrative costs as a percentage of their total
    revenue.
    • Cannot benefit from economies of scale (so low profit margin,
    unable to compete with lower prices)
    • Lack of funding
    • Lack of expert knowledge
    Causes of the growth
    of firms
    • Two types of growth
    • Internal growth
    • External growth

    This Photo by Unknown Author is licensed under CC BY-ND


    Internal growth
    • Internal growth – an increase in the size of a firm resulting from
    it enlarging existing operations or starting new operations.
    • This may involve introducing new products or diversifying.
    • This is sometimes referred to as natural growth or organic
    growth.
    External growth

    External growth – an increase in the size of a firm resulting from it merging or taking
    over another firm.

    The occurs through a merger or takeover

    The main types of mergers are horizontal mergers, vertical mergers, and a
    conglomerate.

    External growth allows a firm to expand far quicker than internal growth.

    However, often the control is lost to an extent.


    Mergers

    This Photo by Unknown Author is licensed under CC BY


    Horizontal Merger
    Horizontal merger
    • Horizontal merger – the merger
    of firms producing the same
    product and at the same stage
    of production.
    • For example - two resort
    brands merging.
    • Simple definition: Same
    industry, Same stage of
    production
    Advantages of a horizontal merger
    • Greater advantage of economies of scale
    • To increase market share
    • Rationalisation – the two firms may not have been using all of
    their resources fully. Merging could help them sell off
    redundant resources. For instance, now they might need less
    managerial staff.
    Disadvantages of a horizontal merger
    • The firm may experience diseconomies of scale
    • A large firm can be difficult to control and inflexible
    • The corporate cultures of the firms may clash
    • Difficult to merge if they are located at different places
    Examples
    2017 May/June q12
    The answer is D
    Vertical
    Merger
    Vertical merger
    • A vertical merger occurs when a firm merges with another firm
    involved with the production of the same product, but at a
    different stage of production
    • Simple definition: Same industry, Different stage of
    production.
    • This can take the form of vertical merger forwards or
    backwards
    Vertical Merger Backwards
    • This is a merger with a firm at an earlier stage of the supply
    chain.
    • For example, a retail shop selling fish products merging with a
    fish can manufacturer.
    • The main reason for this type of merger is to ensure an adequate
    supply of good quality raw materials at a reasonable price.
    • Another reason may be to restrict the access of the rival firms to
    the suppliers.
    Vertical Merger Forwards
    • A merger with a firm at a later stage of the supply chain.
    • For example when an airline may merge with a tour operator.
    • When an oil company buys a chain of petrol stations.
    • The main reason for this merger is to ensure there are sufficient
    outlets, and the products are stored and displayed well.
    • Such a merger may help with development of products.
    • It may also help with marketing.
    • The ability to benefit from a higher
    profit margin.
    • Economies of scale
    The • The ability to reduce the final price
    which is likely to result in higher
    advantages revenue.
    of vertical • Shared expertise coming together from
    mergers two different stages of production.
    • Access to good shelf space in outlets.
    • Product development benefits.
    • Marketing benefits
    • Management problems – as the
    managers might not be familiar with the
    process at the other stage of
    production.
    The • As a firm grows too large, it may face
    disadvantages diseconomies of scale.
    of vertical • Clash of corporate culture.
    mergers • Employees may lose motivation as
    some of their colleagues may be laid
    off.
    2017 Oct/Nov Q13
    The answer is A
    Conglomerate Merger
    Conglomerate merger
    • A conglomerate merger involves the merger of two firms in
    different industries where they produce different products.
    • For example an education company merging with a
    telecommunications company.
    Advantages of a conglomerate merger
    • Diversification
    • Economies of scale
    Disadvantages of a conglomerate
    • Difficulties in coordination
    The effect of mergers on consumers
    • Benefits
    • - Economies of scale can result in lower prices
    • - Consumers may also benefit from high quality products
    because of innovation.
    • Drawbacks
    • -However, if a firm faces diseconomies of scale, consumers
    may face high prices or low quality products.
    • Horizontal mergers may also reduce choices for consumers
    which can result in higher prices.
    Economies
    of scale
    Economies of scale is when the long run
    average costs of a firm decreases as the
    size of the firm increases.

    Economies Most refer to Internal economies of scale


    of scale as Economies of scale.

    External economies of scale occurs when


    the long run average costs decreases
    because the industry is growing in size.
    Diseconomies of scale
    • Diseconomies of scale occurs when the long run average
    costs increase as the size of the firm increases.
    • This happens when firms grow too large sometimes.
    • This is internal diseconomies of scale.
    • External diseconomies of scale arises from an industry being
    too large, causing the firms within the industry to experience
    higher long run average costs.
    Internal economies and diseconomies of
    scale
    • 1) The LRAC may increase again,
    • 2) it may decrease over a large output
    • 3) It may stay constant after reaching a minimum point
    Buying economies

    Types of Selling economies


    internal
    economies Managerial economies
    of scale

    Labour economies
    Financial economies

    Types of Technical economies


    internal
    economies R&D economies
    of scale
    Risk bearing economies
    A farmer using a combine harvester.
    Practice –
    Decide the A pharmaceuticals company setting up a
    laboratory to develop a Covid-19 vaccine.
    type of
    A supermarket chain employing an expert in
    internal chocolate to place its orders with suppliers.
    economies A book publisher buying a large quantity of
    each of the paper.
    following A soap manufacturer buying a two-minute
    advertisement on national TV.
    may be an
    example of A car manufacturer issuing new shares
    Difficulties in controlling the
    firm

    Internal
    diseconomies Communication problems
    of scale

    Poor industrial relations


    External economies and diseconomies of
    scale
    • External economies of scale occurs when the LRAC falls as a
    result of efficiencies in the industry.
    • External diseconomies of scale will raise the LRAC at each and
    every level of output as the as a result of the inefficiencies in
    the industry.
    • This may happen because there are too many activities.
    A skilled labour A good
    force reputation

    Types of Specialist
    external suppliers of raw Specialist
    materials and services
    economies capital goods
    of scale
    Specialist Improved
    markets infrastructure
    1. What is most likely to be supplied by
    small firms?
    • A. Banking
    • B. Film Production
    • C. Shoe repair
    • D. Steel
    The answer is C
    2. A toy manufacturer merges with a chemical
    company. What type of merger is this?
    • A. Conglomerate
    • B. Horizontal
    • C. Vertical Merger Backwards
    • D. Vertical Merger Forwards.
    The answer is A
    3. Explain why firms decide to stay small?
    (4 marks)
    4. Analyse two economies of scale
    (6 marks)
    5. Discuss whether or not a merger between
    two book publishing firms will benefit
    consumers (8 marks)
    Thank you!

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